Investment funds always warn potential investors that “past performance is no guarantee of future results” — that is, simply because an asset or manager has performed well in the past, that performance isn’t a guarantee those results will be replicable. While most investors are comfortable with this fact, it is strange that most of the world considers that China, the engine room of the global economy, will continue its upwards trajectory indefinitely — in short, why does the world think China’s past performance is a guarantee of its future results?

To assume that China’s economy is a perpetual growth machine is to also ignore the realities of a growing economy. The industrialisation of China, while lifting output, also causes internal wage pressures, which in turn can reduce the competitive advantage which fuels China’s growth.

The Australian Financial Review’s China correspondent, Colleen Ryan, provided a fascinating insight into China’s employment market yesterday and the pressures that could not only stop China’s boom, but could have disastrous consequences for already anaemic global growth.

Ryan noted:

The is a demographic shift taking place in China thanks to the One Child policy, which has now been in operation for 32 years. There is a decline in the number of 18 to 24 year-olds coming onto the job market — the age group that provides factory fodder in China. The Little Emperor and Express syndrome that has accompanies the one child family has also meant that those who do enter the factory workforce are less likely to put up with poor conditions and low wages.

Unlike previous generations, they have more flexibility. Their parents are wealthier and they can, and often do, return home when the going gets tough.

Even worse, according to the Beijing Consultancy Dragonomics, the number of Chinese workers ages between 15 and 24 will fall by a third in the next 12 years. It appears that China’s apparently infinite well of cheap labour may not be as deep as many imagined.

The growing power of Chinese workers was exhibited earlier this year when workers at Foxconn (the electronics company which provides products to Apple and Hewlett Packard) obtained a 100% pay rise after conducting a rare strike (conditions at Foxconn were apparently so poor, that more than ten employees committed suicide).

While growing wages are an indication that China is finally dragging itself out of its previously Communist ways and raising living standards for its burgeoning urban population, the implications for global growth may be stark. It is China’s low wages and incredible savings which fuelled global growth in the past decade. China’s ability to continually ratchet down costs (by improving technology and maintaining low employment costs) has led to exported deflation for goods sold to developed Western nations. This is the ‘good’ type of deflation, where the costs of consumer goods like electronic items falls, leading to higher living standards for those who are importers of those goods.

But like anything, the good times in China appear slowly to be coming to an end. While the process may take decades, the combination of continued demand for Chinese goods (both within China and abroad), coupled with Government policies which act to restrict supply of workers will have the inevitable effect of forcing up the cost of buying products from China.

If and when wage inflation starts in China, it is unlikely to be contained — wage growth expectations, even in highly planned economies, will have a sharp effect on growth and reduce the positive impact that China has had on global economies in the past decade.

Disclosure: The author has a short position on the S&P500 index.